Financial IntermediariesAn economic community can prosper only when it is able to employ its resources optimally. However, this does not happen on its own, as all people are not endowed with resources that could be deployed productively. Therefore, the resources are required to be moved from those who have it and made available to those who can make use of it. If this function is not achieved, the economy may stagnate. This aspect brings out the need for financial intermediaries. Need for Financial Intermediation Financial intermediaries play an important economic function by facilitating the productive use of the community’s surplus money. The continuous use of such resources by an economy will foster greater demand for goods and services and in generation of incomes and employment in an economy. The combined wealth created gets channelised in the form of assistance to entrepreneurial activities, which are undertaken by another set of people who have the necessary inclinations. However the following questions arise:
These questions will get answered only when the process of transfer takes place and the roles played by a third agency, which is known as a financial intermediary, facilitates such transfers. Intermediation and management of risks The need for a financial intermediary arises because the savers would not voluntarily come forward to lend directly fearing certain risks. In the process, intermediaries manage the risks in an effective manner to minimize the chances of loss. The process of transferring the funds from the savers to the entrepreneurs is call intermediation. In essence, intermediation is the management of risks. Such risks are as follows:
The risk-averse nature of normal savers and the risks inherent in any entrepreneurial activity necessitates intermediaries who have the ability to insulate the savers from the risks inherent to business. Intermediaries not only manage such risks associated with business, but also generate employment and promote economic welfare by enabling production of goods and services required by the community. Hence, intermediation by the financial intermediaries is also an important economic function. |